Sunday, October 31, 2010

Apple's Mac Not Yet Irrelevant

A friend and Microsoft engineer asked me a few years back why Apple bothered to make anything but music players. They really had something with the iPod, after all. But what could Apple manage in computers now that the platform war was over?

I tried to suggest that he misunderstood Apple's product by mentioning that Apple built multiprocessor rack-mounted servers that were highly-regarded for their maintainability. I wanted him to understand that Apple supplied a fairly complete line-up from lightweight laptops to massive supercomputer clusters ranked in the top 500 computer systems worldwide. He didn't get the picture, but instead wondered: why did they bother? Not getting Apple was apparently common at Microsoft. (Apple still bakes high-performance computing support into Macs, incidentally.)

The answer becomes clearer with each passing quarter: Apple sells a lot of computers, and makes good money on them. Recently, Apple stood ranked as the #4-ranked PC vendor in the US by volume (higher by profit) and was a shockingly small number away from the #3 position. Although iPads and music and software are all hot sellers, Macs have better margins and they are a growing market. The more powerful the hardware becomes at a lower price, the cheaper Apple will be able to build outstanding products and the larger will be its addressable market. Competitors who can't offer Apple's differentiating features will be forced into a classic commodity pricing competition and will compete their profits toward break-even. Apple, which owns quite a bit of the intellectual property in its products and spends less per unit licensing technology from third parties, has a margins advantage at any price point at which it sees fit to compete.

MSFT: HTML5 for Compatibility

Microsoft's server president Bob Muglia confirmed that although Silverlight was the primary development platform for Microsoft's phone platform, and that MSFT viewed Silverlight as having good prospects for some applications, the company's broader cross-platform efforts would rely on HTML5.

At MSFT's "Professional Developer Conference" there were no Silverlight sessions and few mentions, but lots of discussion of HTML5. In Microsoft's depiction of Ballmer's remarks at the PDC, for example, the word "Silverlight" appears one time (the other two times on the page aren't in the remarks, but in links outside the remarks), whereas "HTML5" appears 32 times.

Adobe's position on Flash as the standard for cross-platform development grows increasingly less credible with each defection. Shocking though it may seem, some standards even Redmond has accepted.

Saturday, October 30, 2010

Apple Advances Again

Apple's cell phone unit volume has passed that of Research in Motion to take the fourth slot in cell phone unit sales worldwide. Advances in Apple's performance metrics haven't been confined to growing phone share.

Apple, which earlier this year passed Microsoft in market capitalization, just passed Microsoft in revenue in the third calendar quarter of 2010. With Microsoft failing to pull developers onto its new mobile phone platform, Microsoft won't be catching up with revenues from phone operating system licensing. The gross revenue number isn't identical to profitability, but it's an important metric with which to gauge the companies' ability to attract customers' funds. It's a relevance-ometer. Apple's revenues have been growing briskly in recent years, and its ongoing product rollouts in its many markets offer grounds to expect continued growth in the immediate future.

Apple's high-growth trajectory has taken it into an area few would have predicted only a few years ago. The company remains a volatile holding, but its absolute performance and its growth suggest that its share price is backed by a real and growing relevance in the markets in which it competes. Apple is unquestionably a quality provider in its relevant markets, and it markets for profit rather than window-dressing metrics such as profitless unit share (remember the beige-box races for the top slot in PC sales?). Apple isn't squandering precious resources chasing phantoms, it's building and innovating and creating a future for itself and its customers.

Thursday, October 28, 2010

Apple: Still Growing

Last year, Apple co-founder Steve Jobs appeared on an earnings report to announce that Apple had had its first quarter that annualized to a $50B/year revenue rate. This year, Jobs is back. Apple's first $20B quarter isn't a Christmas quarter, it's the back-to-school quarter of 2010.

Apple has increased advertising expense, but revenue growth actually caused Apple's advertising expense to decrease as a percentage of revenues. Apple announced that its margins would be lower in the future, but it's made that prediction before. Apple's "low" margin areas of operation include its online stores for downloaded content (iTunes and the App Store), in which Apple takes 30% of gross, and against which it charges lots of advertising and datacenter overhead. Apple's new portable devices, which are themselves portals to the online stores, offer more hardware for the dollar than some of Apple's higher-margin computers. Apple always runs the risk that recalls, parts costs, and other contingencies might eat into margins. Apple's margins decline has worried some folks.

Apple isn't losing margins because it's being forced to compete in a commodity market: Apple has priced products to attract buyers. Neither Dell nor Acer can get the margins Apple does out of hardware; Apple is clearly still selling a differentiated product. Apple's pricing strategy appears to be a deliberate effort to leverage consumer appetite for electronics by pricing products to move volumes rather than to maintain an artificial per-unit margin. The result is clear from the iPhone experience: price it correctly, and the world is Apple's. Apple's profits have continued to increase, and profit hasn't eroded as a result of Apple's new product initiatives, the profit has grown.

Of significant interest to the Jaded Consumer in this regard is Apple's re-imagination of the iTV. Oh, sorry: the AppleTV. AppleTV is now no longer a set-top console, but an Airport Express that supports video and allows, for example, Netflix subscribers to get content onto their HDTV sets wirelessly from their computers. At $99, it's almost an impulse buy. When you buy it, you get another portal into Apple's online store.

Apple doesn't talk about future products, but Apple now competes with netbooks on size, even if not stooping to their typically abysmal performance.